Securities Exchange

When the SEC began an investigation of whether a Facebook post by the Netflix CEO violated Regulation FD, companies became alarmed that it represented the regulator's views that social media should not be used to disclose important information to the market. As we explain in our memo, the SEC has recently issued a report that affirmed the availability of social media as an appropriate channel of dissemination, but only in accordance with specific principles that builds on its prior guidance from 2008. Joe Hall, a partner in our capital markets group, explains the key aspects of how companies can avail themselves of this benefit without tripping the regulatory requirements.

• What is most helpful about the new guidance that the SEC has given companies about Regulation FD compliance in the context of social media?
  
  The SEC has now said that the key to satisfying Regulation FD depends on whether the company has adequately informed investors, the market and the media that it will use social media to communicate information. This emphasis on advance notice takes us away from the prior focus on whether a company's website was already a recognized channel. Companies can now take concrete steps to take advantage of social media for this purpose.

• What's the first step a company should take if it decides that it wants social media to be a Regulation FD distribution source? 
  
  Companies need to decide which channels they want to use and be specific in identifying the precise location where material information will appear, such as the specific URL, Twitter handle or Facebook pages, rather than generic home pages. It can also be helpful to tell investors when you will provide information in some cases, such as an upcoming earnings release, as well as where.

• Once a company identifies the social media venues, how should they communicate that to investors?
  
  Companies should prepare a brief statement explaining what they plan to disclose, and where they plan to disclose it. This paragraph should be published regularly in annual and quarterly reports, as part of press releases (perhaps in "about the company") and on the home page of the corporate website. Changes should be publicized well in advance. 

• Given that many companies may be adding to the number of different places that investors are expected to find information, can "push" technology help alleviate the possible burden to investors in terms of keeping track?
  
  It would be ideal for companies to have mechanisms available for investors to receive alerts when there is new information, such as the ability to subscribe to RSS or other feeds. Companies should make clear what feeds are available and how to subscribe, and give sufficient time to investors to do so before using the particular channel.

• What are your thoughts on whether companies will start using social media to comply with Regulation FD?
  
  We expect that practice will continue to vary on whether companies will use social media this way and for what types of information. An important point to keep in mind is that once a company has announced to the market that it will be using, for example, the CEO's Facebook page to distribute important information, the company needs to use it the way it described. Sporadic or inconsistent use may prevent the development of the kind of market following that the SEC is clearly looking for.

Professor Joseph Grundfest at Stanford Law School and The Rock Center for Corporate Governance suggests that the SEC should not initiate enforcement action against Netflix in his article, “Regulation FD in the Age of Facebook and Twitter,” which was sent to the SEC as an Amicus Wells Submission. At issue is whether Netflix violated Regulation FD because of a posting made by the CEO to his Facebook page that claimed monthly viewing exceeded 1 billion hours for the first time. 

The article contends that the posting contained no material information as the market was already aware at the time that the company was delivering close to a billion hours for the month as evidenced by several press reports. The viewing metric was not linked to any compensation scheme and did not affect the company’s valuation. In addition, the message was written in the form of a congratulatory note to certain employees and not designed to influence investors. 

Central to the dispute is the use of social media to communicate corporate information. The article claims that the Netflix CEO posting was reasonably designed to provide “broad non-exclusionary distribution” and did not constitute selective disclosure. The CEO’s Facebook page had 205,000 followers, as proven by the rapid and wide dissemination of his message through Twitter feeds and also traditional media. Unlike the 13 prior Regulation FD cases, the message was broadly accessible by the general public instead of targeting the investment industry insiders central to the objectives of Regulation FD. In previous precedents where companies were found to have violated Regulation FD, the companies controlled the recipients, with the largest group numbering 200, whereas Netflix made no efforts to limit who saw the posting.

The article argues that Netflix’s actions are not inconsistent with prior Staff guidance regarding the use of company websites and Regulation FD. While the SEC’s 2008 guidance favored advanced notification that material information may be communicated through company websites, that guidance also indicated that use by investors and the market of the company website can substitute for the company actions to alert the market to information being available. 

Professor Grundfest raises an interesting question of whether Regulation FD would survive a constitutional challenge as a restraint on truthful speech, particularly as applied to this case. The debate may focus on whether the SEC’s explicit preference for using press releases, Form 8-Ks and static webpages violate the First Amendment as discriminating against social media, in the absence of any showing that social media is less effective in achieving the regulation’s objectives. It may be possible to characterize Regulation FD as a prohibited content-based regulation which limits truthful, material speech when expressed by certain persons (the issuer) to certain recipients (investors), that cannot be made through any communication means other than those explicitly endorsed (Form 8-Ks). 

Bringing forth a case against Netflix may also be futile, since the investigation has already obtained the remedy it seeks and chilled the use of social media without making a contemporaneous 8-K filing. The article references numerous law firm memos advising companies to exercise extreme caution in using social media to disclose information.

3,001 whistleblower tips from all 50 states and 49 countries were provided to the SEC in the 2012 fiscal year, according to its annual report on the whistleblower program. The annual report is required to be issued to Congress by the Office of the Whistleblower under Dodd-Frank. 

The report indicates that the most common complaints related to corporate disclosures and financials (18%), offering fraud (16%) and manipulation (15%). Other types of issues, including insider trading and FCPA, accounted for much smaller categories of reporting. The bulk of the tips inside the U.S. came from California (17.4%) with New York and Florida following at about 10% and 8%, respectively. Internationally, the U.K. produced vastly more tips, trailed by Canada, India, China and Australia in that order. 

143 enforcement judgments and orders issued during 2012 potentially qualify as eligible for whistleblower awards. It appears that so far less than $50,000 has been paid out to whistleblowers, and the report only mentions a single instance that we previously discussed in our memo. 

When the SEC decided to eliminate the ability of brokers to vote on a discretionary basis without specific client instruction for director elections in July 2009, many predicted that it would seriously affect the ability of directors to obtain majority support.  The concern proved to be a false alarm.  As a result, when the Dodd-Frank Act required the elimination of broker discretionary voting for executive compensation matters, including say-on-pay, there wasn't nearly the same chatter. 

But it turns out that given the closeness of many of the failed say-on-pay votes, the reported broker non-votes would have made a real difference.  We calculated that 7 of the 21 companies reporting failed votes so far would have passed, in some cases by a decent margin, if the non-votes had actually been counted as "for" say-on-pay, which is not an unreasonable assumption given these discretionary votes generally favored management.  For one company, there were more broker non-votes reported than "for" votes. 

Currently for most companies the only proxy item that brokers can continue to vote on without client direction is auditor ratification.  In addition, many are not aware that the NYSE usually permits brokers to vote at their discretion on most management proposals to amend charters, including to declassify boards, eliminate supermajority provisions or allow special meetings of shareholders.  Since NYSE Rule 452 governing discretionary voting has a specific list of "cannot vote" items, items not on the list, and not viewed as contested, can be marked as a broker-may-vote matter by the NYSE.

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